in a pricing rising, and inventory quantity stable environment, FIFO will have higher net income, higher tax, and lower cash flows (due to higher tax). net income is already after tax value, if tax reduce cash flow, it also should reduce net income, make it lower compare to LIFO, is it? Thanks.
LIFO, FIFO, rising prices and stable or increasing inventory have the following effects: LIFO: Higher: COGS, Cash Flow LIFO: Lower:Income before taxes, income taxes, net income, inventory balance, working capital FIFO: Lower: COGS, Cash Flow FIFO: Higher:Income before taxes, income taxes, net income, inventory balance, working capital
yeh, just think about it in order: LIFO–>higher COGS->lower Income->lower taxes->higher cash flow. -->lower inventory->lower working capital. FIFO is just the opposite… and if prices are decreasing, then its the opposite again
but net income is after tax, is it? thanks. how it could have higher income, which already adjusted afte tax, and but have lower cash flow? Thanks. Bluey 1.8T Wrote: ------------------------------------------------------- > yeh, just think about it in order: > > LIFO–>higher COGS->lower Income->lower > taxes->higher cash flow. > -->lower inventory->lower working capital. > > FIFO is just the opposite… > > and if prices are decreasing, then its the > opposite again
yeh, take a step back… i see it as: Revenue - COGS _______ Gross profit so, higher cogs, means lower gross profit…lower profit means you pay less income tax…tax is a cash outflow… if you pay less tax, you have a smaller cash OUTFLOW, which means you have a higher cash FLOW
Because taxes are considered a cash expense, but all components of net income are not (ie depreciation) and that taxes are only a percentage of pretax income. FIFO=lower COGS=Higher Pretax Income=Higher Net Income (Although also higher taxes) Higher taxes=lower CF